Eurobonds or external bonds - What are the benefits of investing in eurobonds?

Eurobond is a fixed debt instrument that is issued in a currency that is required by the issuer but outside the borders of the currency’s country. They are not to be confused with Eurobonds (stable bonds) issued in the EU collectively by the State Members and European Central Banks. The eurobonds we are talking about is also known as external bonds because they are issued in external currencies in another country. They are usually attached to the currency they are issued, such as eurodollar bonds or euro-yen bonds.

Here, we explore what eurobonds are and how they are beneficial to you as an investor:

1. Understanding eurobonds

Eurobond is a unique fixed debt instrument due to its characteristics. As such, the bond currency is different from the local one of the country where it is issued. For example, a Japanese company can issue bonds in dollars, rather than their own currency, Yen, in Japan to raise capital in US dollars. In this case, the eurobond will be called eurodollar bonds because they are named based on the currency they are issued in. Eurobonds can be issued by a company, the state or syndicates. They are handled by a syndicate of various financial bodies on the borrower’s behalf to underwrite and guarantee the purchase of the bonds.

Why are eurobonds important?

Many corporations and organisations benefit from eurobonds due to their flexibility in issuing in external currencies in their own country. The main reason for issuing eurobond is to raise capital in foreign currency to finance its operations. Imagine if a company in the US wants to enter the Chinese market to expand but does not have the capital in the local currency Yuan they need to invest. In such a case, the company can issue bonds in the US in Yuans in hopes for Yuan holders to buy the bonds and provide the capital it needs to enter the Chinese market. After the capital in Yuan is invested in China and it yields profit, the company can pay the lenders with fixed interest.

How are they different from Foreign bonds?

Foreign bonds require the issuers from another country to issue bonds in the local currency, whereas, eurobonds are issued in a foreign currency outside the country of the currency. For example, a Chinese company issuing bonds in dollars in the US foreign bond market for the local buyers to buy the bond. That is a foreign bond. In both cases, the issuers need external currencies, except foreign bond issuers are not local to the country, and they issue the bonds in a foreign country where they need their local currency. In comparison, eurobond issuers issue it in their own country but in a foreign currency.

2. Benefits of eurobonds

Eurobonds are growing and becoming more popular for smaller companies to raise capital. In fact, the largest portion of eurobond issuance lies with emerging markets, with both the government and companies wanting to take advantage of its flexibility. For issuers, the benefits of eurobonds are:

  • Flexibility to choose the country of the currency they need
  • Flexibility to choose a country with low-interest rates
  • Lack of currency risks
  • Flexibility to choose bond maturity period
  • Access to a market that would otherwise be impossible without eurobonds

For investors, Eurobonds are a way to expose them to foreign investments while staying in their own country. They are also cheap, very liquid and helps diversify their portfolios. The cost is low for investors, making it affordable to invest.

3. Risks of eurobonds

Since eurobonds are international, the risks are mostly related to currency fluctuations. Despite the lack of currency risk, it is not completely eliminated. Currency risk has the highest possibility of affecting eurobond due to unfavourable exchange rates. However, investors can hedge such risks through currency futures contracts or options, where the investor locks on a fixed rate for buying or selling of the currency in the future. Although future contracts carry their own risks, which require their own research.

Investors can buy eurobonds like most bonds through stock exchanges. At the moment, the largest eurobond hubs are the Luxembourg Stock Exchange and the London Stock Exchange. Getting in touch with an expert would be beneficial to understand the unique risks of eurobonds.

Last update: 05/08/2021

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